There are different types of fixed-income investments, which all come with their perks and perils. One of the most popular types is the fixed income investment. This is a common type of investment that is firmly established on the side of caution. Many get involved due to its security in capital and profit. Here’s everything you should know about a fixed income investment.
What are fixed income investments?
Fixed income investments are hinged on the preservation of your capital and income. They are very secure, and mostly comes with a steady stream of income compared to stocks. Good examples of these are government bonds that are fully secure and backed by the good fate of the government and corporate bonds.
What are the benefits of fixed income investment?
There are numerous benefits to fixed income investment, which could vary depending on your financial goals. Some of these potential benefits are:
- Low risks:
this is true especially when compared to the stock market, and is because of the nature of fixed income investments. These kinds of investments are less sensitive to macroeconomic risks such as geopolitical events and economic downturns.
- It helps you diversify your portfolio by including a secure investment.
It also removes the risk of potential losses when the stock market swings. On the other hand, if you invest only in stocks, then be ready for a huge loss in such a situation.
- Capital preservation:
when you invest in fixed income, it preserves the absolute value of your investment. This results from the stated objectives of the principal return of your investment. It makes fixed income investments suitable for those who have less time to recoup losses, like if you are close to retirement.
- Income Generation:
Fixed income investments generates a steady source of income for you as an investor. You would mostly receive income at fixed intervals and this income is mostly exempt from taxes.
- Total return:
Depending on the specific type and nature of your fixed income investment, you can generate high returns. This is true especially when you assume more interest rate risk or credit risks.
What are the risks associated with fixed income investment?
The major risks associated with fixed income investments are:
- Interest rate risk:
Interest rate risks play a major role in the cause of price volatility in bond markets. Generally, when they rise, bond prices fall, and the bond you already own loses value.
- Inflation risk:
Inflation is one of the formidable enemies for you as a fixed income investor. This is because although you receive a fixed income at regular intervals, it could be outpaced by inflation. When this happens, your money loses purchasing power, therefore you did not really make a profit.
- Credit risk:
Credit risk is the tendency that an issuer may default on its debt obligation to investors. This is what is called credit risk and you take it upon yourself as an investor when you invest in fixed income. If the issuer defaults, you do not receive the full value of your capital, and therefore incur some losses. Fixed income investment always sees you take on credit risk as well as interest rate risk.
- Liquidity risk:
This is the possibility that you as an investor might want to sell a fixed income investment, but have no buyer.
How do I manage the risk associated with fixed income investments?
You can do this by simply diversifying your investment within your fixed income portfolio.
How do I make a fixed income investment?
To purchase a fixed income investment is quite difficult as an individual. This is because it requires a high minimum investment that could run into millions or billions. It also involves high transaction costs and a lack of liquidity in the bond market. It is however possible if you have the means.
To circumvent this difficulty, you can invest through mutual funds or exchange-traded funds. Visit any licensed financial institution or stockbroker for the process on how to do this.
Fixed income investments are very secure and come with good returns. You should however analyze the market and consider the risk involved so that you do not incur losses. It is a good option if you desire a low-risk way to diversify your investment portfolio.